<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED       December 31, 1997
                         -------------------------------------------------------

                                       OR

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

          FOR THE TRANSITION PERIOD FROM           TO 
                                        -----------  --------------

                                                                 
                COMMISSION FILE NUMBER         0-11777    
                                       --------------------------

                          FIRST EQUITY PROPERTIES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Nevada                                          95-6799846
-------------------------------------------------      -------------------------
    State or other jurisdiction of                          (I.R.S. Employer
    incorporation or organization                          Identification No.)

10670 N. Central Expressway, Suite 410, Dallas, Texas               75231
------------------------------------------------------      --------------------
       (Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code            214 750-5800
                                                  ------------------------------

Securities registered pursuant to Section 12(b) of the Act:

       Title of each class             Name of each exchange on which registered
              None
---------------------------------      -----------------------------------------
---------------------------------      -----------------------------------------

           Securities registered pursuant to section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
--------------------------------------------------------------------------------
                                (Title of class)


--------------------------------------------------------------------------------
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.     Yes  X    No 
                                                 ------    ------ 

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

         Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.        YES  X     No 
                                ------     ------   

         As of March 13, 1998, registrant had 10,570,944 shares of common stock
issued and outstanding. Of the total shares outstanding, 2,642,736 shares were
held by other than those who may be deemed to be affiliated, but the aggregate
market value of such shares held by non-affiliates is not ascertainable since no
trading market presently exists for the shares of common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None



<PAGE>   2


ITEM 1.  BUSINESS.

         First Equity Properties, Inc. (herein referred to as "FEPI" or
"Registrant" or the "Company") was incorporated by the filing of Articles of
Incorporation in the State of Nevada on December 19, 1996. Its fiscal year ends
December 31 of each year.

         Prior to January 1, 1997, the Registrant's only business consisted of
the management and operation of three motel properties in the Spokane,
Washington area. During the fiscal year ended December 31, 1997, the Registrant,
through its own operations and those operations of its subsidiaries, was and, at
present, is engaged in the hospitality business (management and operation of
three motel properties), property management (management of commercial real
property, including retail centers, office buildings, industrial properties and
hotels), and real estate brokerage (services in locating, leasing and purchasing
real estate). See Note T to the Consolidated Financial Statements for a break
out of revenues, expenses and earnings contributions of each separate line of
business.

TRANSACTION OF SUCCESSION.

         Wespac Investors Trust III ("Wespac" or the "Trust"), a California
business trust had its shares of beneficial interest, no par value, registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934 and made its
last filing with the Securities and Exchange Commission (the "Commission") as a
Form 10-K for the fiscal year ended December 31, 1987. Since April 1988, Wespac
was the subject of two filings for protection under Chapter 11 of the United
States Bankruptcy Code, one filed April 13, 1988 (the "1988 Reorganization")
which resulted in a plan of reorganization approved and confirmed by the court
on March 29, 1989 with certain amendments, and which was closed by the court on
August 21, 1992 and a filing made January 27, 1994 in the case styled In re:
Wespac Investors Trust III, Case No. 94-00228-K11, in the United States
Bankruptcy Court for the Eastern District of Washington (the "1994
Reorganization"). A plan of reorganization dated March 22, 1996 (as modified)
was confirmed by Order Confirming Plan of Reorganization dated May 15, 1996,
entered May 20, 1996, as amended by order entered October 29, 1996 approving
First Modification to Plan of Reorganization (the "Modified Plan"). Pursuant to
the Modified Plan, there was distributed to the shareholders of Wespac a
proposal to convert Wespac from a California business trust into a Nevada
corporation through the "Incorporation Procedure" described therein coupled with
a change of the name of the resulting entity. Such proposal was distributed to
the shareholders of Wespac who, by November 29, 1996, approved the proposal by a
vote in excess of 84% in favor. The Incorporation Procedure was implemented and
resulted in the transaction of succession which created First Equity Properties,
Inc. as the ultimate successor-in-interest to Wespac




                                      -2-
<PAGE>   3

with each of the shareholders of Wespac prior to the commencement of the
Incorporation Procedure becoming shareholders of First Equity Properties, Inc.
on a one-for-one exchange basis. On February 11, 1997, the Court entered its
final decree which closed the 1994 Reorganization. See "Item 3. Legal
Proceedings."

         A simplified explanation of the "Incorporation Procedure" is Wespac was
incorporated in California pursuant to Section 200.5 of the California
Corporation Code under the name Wespac Property Corporation on December 16, 1996
(the "California Corporation") and the California Corporation (as the immediate
successor to Wespac) was then merged with and into a wholly-owned Nevada
subsidiary corporation (the "Merger") named First Equity Properties, Inc. on
December 24, 1996 with the Nevada Corporation being the survivor to such Merger.
The Board of Trustees of Wespac caused the Nevada Corporation to be organized in
Nevada under the name First Equity Properties, Inc. by the filing on December
19, 1996 of Articles of Incorporation. Prior to the Merger, such Nevada
Corporation had no significant business, assets or liabilities of any
consequence and no operating history. Under Section 200.5 of the California
Corporation Code, which governs the process of incorporating a business trust,
following the approval of the affirmative vote of a majority of the outstanding
shares of beneficial interest, such existing trust may then file articles of
incorporation with a certificate attached, signed by certain officers of that
trust stating that the incorporation of the association has been approved by the
trustees and the required vote of shareholders and upon the filing of articles
of incorporation pursuant to that section, the resulting California Corporation
succeeded automatically to all the rights and properties of Wespac and became
subject to all of Wespac's debts and liabilities in the same manner as if the
California Corporation had itself incurred them. The three trustees of Wespac
constituted the initial directors of the California Corporation and the Nevada
Corporation and all rights of creditors and all liens upon property of Wespac
were preserved unimpaired. Any action or proceeding pending by or against Wespac
may continue to be prosecuted at judgment, which shall bind the California
Corporation or the California Corporation may proceed against or be substituted
in its place. Following the incorporation of Wespac into the California
Corporation, the Merger was accomplished by Articles of Merger and a Plan of
Merger filed in the States of California and Nevada on December 24, 1996. The
surviving corporation (in this instance First Equity Properties, Inc., the
Nevada Corporation) automatically, by operation of law, succeeded to all of the
assets, rights, duties, liabilities and obligations of the California
Corporation (as successor to Wespac) upon the effectiveness of the Merger on
December 24, 1996. Pursuant to the Merger, each share of beneficial interest of
Wespac issuable pursuant to the Modified Plan has been deemed converted into one
validly issued, fully paid and nonassessable share of common stock, par value
$0.01 per share of FEPI.


                                      -3-

<PAGE>   4


HOSPITALITY BUSINESS

         Prior to December 31, 1996, the Company's only business consisted of
ownership and operation of two Comfort Inn hotels and one Rodeway Inn hotel
(sold June 1, 1997) located in Spokane, Washington. The two Comfort Inn hotels
are The Comfort Inn-Valley (a 76-room hotel located at N. 905 Sullivan Road,
Spokane Valley, Washington) and The Comfort Inn-North (a 96-room hotel located
at N. 7111 Division Street, Spokane, Washington).
Such properties are collectively referred to as the "Spokane Properties."

         Until its sale by the Company on June 1, 1997 to a corporation owned by
a former director and officer of the Company, the Company owned a 90-room hotel
located at W. 4301 Sunset Boulevard, Spokane, Washington which was a Rodeway Inn
(the "Spokane Rodeway"). See "Item 13. Certain Relationships and Related
Transactions." During January 1998, the Company foreclosed on the Spokane
Rodeway following a failure of performance by the purchaser on the related note
receivable. See Note Q to the Consolidated Financial Statements.

PROPERTY MANAGEMENT

         Effective January 1, 1997, the Company acquired all of the issued and
outstanding Common Stock of Carmel Realty, Inc., a Texas Corporation ("Carmel"),
and an 81.6% limited partnership interest in Carmel Realty Services, Ltd., a
Texas limited partnership ("CRSL"). See "Item 12. Certain Relationships and
Related Transactions." Carmel is engaged in the management and direction of
various portfolios of commercial real property including retail centers, office
buildings, industrial properties and hotels. Carmel maintains the management
responsibility for five hotels totaling 1,000 rooms and approximately 15,000,000
square feet of commercial real estate. CRSL manages multi-family portfolios
which include over 32,000 multi-family units through seven third-party regional
management companies.

         Both Carmel and CRSL provide management services primarily to five
publicly-traded real estate entities throughout the continental United States.
Under such arrangements Carmel or CRSL receives a fee of 5% or less of the
monthly gross rents collected on the properties under Management. CRSL
subcontracts with other entities for the provision of property level services.
All property management contracts pursuant to which Carmel and CRSL provide
management services to the five publicly-traded real estate entities are subject
to cancellation on 30 days' written notice. Carmel and CRSL have not expended
any significant sum during each of the last two fiscal years on research and
development activities.


                                      -4-

<PAGE>   5


         The real estate business overall, including management of real estate
business, is highly competitive and Carmel and CRSL compete with numerous
entities engaged in similar activities, some of which may have greater financial
resources than those of Carmel and/or CRSL. Management of Carmel and CRSL
believe that success against such competition is dependent upon the geographic
location of the properties, the performance of the property managers in areas
such as marketing, collections and the ability to control operating expenses,
the amount of new construction in the area and maintenance and appearance of
each individual property. Additional competitive factors with respect to
commercial industrial properties are the ease of access to the property,
adequacy of related facilities such as parking, and sensitivity to market
conditions in setting rent levels. With respect to multi-family residential
units, competition is also based upon the design and mix of the units and the
ability to provide a community atmosphere for tenants. Management of Carmel and
CRSL also believe that general economic circumstances and trends and new
properties in the vicinity of each of the properties managed by Carmel and CRSL
are also competitive factors.

         At March 13, 1998, Carmel has 135 employees and CRSL has 5 employees.

REAL ESTATE BROKERAGE

         Carmel also provides real estate brokerage services (on a nonexclusive
basis) to five publicly-traded real estate entities and a number of other
entities and individuals and receives brokerage commissions under varying
arrangements from a fixed amount to a sliding scale on a percentage basis. In
general, such services include assistance in locating, leasing or purchasing
real estate. Carmel receives fees equal to the lesser of (i) a percentage of the
cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated
brokers, or (ii) the compensation customarily charged in arm's-length
transactions by others rendering similar property acquisition services as an
ongoing public activity in the same geographical location and for comparable
property.

ITEM 2.  PROPERTIES.

         Prior to December 31, 1996, the Company's only business consisted of
ownership and operation of two Comfort Inn hotels and one Rodeway Inn hotel
(sold effective June 1, 1997 and foreclosed upon during January 1998) located in
Spokane, Washington.

                                      -5-

<PAGE>   6


         The Comfort Inn North is a 96-unit, two and three story wood frame
hotel located on leased land at N. 7111 Division Street on a site consisting of
approximately 78,261 square feet in unincorporated Spokane County, Washington.
The site (which is the subject of a ground lease) is adjacent to the Spokane
city limits on Division Street, which is the major commercial strip in north
Spokane, Washington. The property consists of a single motel building without
elevators, the main portion of which was constructed in 1984, consisting of 82
units and an additional 14 units in a separate wing were added later. Access to
all guest rooms is from interior hallways; all rooms are air conditioned; some
rooms have Jacuzzi-type whirlpool baths and other rooms have kitchenettes. The
ground lease, together with an option to renew, runs thorough April 2054,
stipulates reciprocal parking and access easements over the property and
adjacent properties controlled by the lessor and requires the Company as the
lessee to operate a motel on the property.

         The Comfort Inn Valley is a 76-unit motel complex located at N. 905
Sullivan Road in the Spokane Valley neighborhood of incorporated Spokane County,
Washington and consists of two separate wood frame, two-story buildings without
elevators, one building containing 50 units and one building containing 26
units. The motel was constructed in phases between 1997 and 1984. Access to the
guest rooms is from interior hallways and additional amenities include one small
meeting room, an outdoor heated but uncovered swimming pool, an indoor
whirlpool, spa and exercise room, and coin operated guest laundry facilities.
The property location consists of 2.41 acres with frontage on a major artery
which connects with the I-90 freeway about one block north of the property.
Although the property does not have direct freeway visibility, it does have good
access and is located directly across the street from another motel which has
the highest room rates in the Spokane Valley market.

         The Spokane Rodeway is a 90-unit five-story single motel structure of
reinforced concrete and cement block construction, with one elevator and a 6,200
square foot restaurant, cocktail lounge, kitchen and meeting room, located at W.
4301 Sunset Boulevard, Spokane, Washington. The property site contains
approximately 3.45 acres of which 3.09 acres are owned in fee simple and the
balance is leased from the City of Spokane. The Spokane Roadway fronts on
Business Loop I-90 approximately 2-1/2 miles west of downtown Spokane and 3
miles east of Spokane Airport. Access to all guest rooms is from interior
hallways; all rooms are air conditioned; there is an outdoor swimming pool and
an indoor whirlpool spa and sauna.

         Management of the Company considers the Spokane Properties to be
suitable and adequate for their present uses.


                                      -6-
<PAGE>   7



ITEM 3.  LEGAL PROCEEDINGS.

         During January 1988, four of the elected Trustees of Wespac resigned
pursuant to an agreement with U.S. Real Estate Advisors, Inc. ("USREA"), a
privately held California corporation, and four new trustees were elected, all
of whom were officers of USREA. Also, during January 1988 Wespac entered into
certain financing arrangements with USREA and on April 13, 1988 the Trustees who
were also officers of USREA caused Wespac to file for protection under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Central District of California under case No. 88-02222-JR which resulted
in a plan of reorganization approved and confirmed by the Court on March 29,
1989 with certain amendments. The 1988 Reorganization was closed by the
Bankruptcy Court on August 21, 1992.

         Wespac acted as a Debtor-in-Possession in the 1988 reorganization which
concluded in the Third Amended Plan of Reorganization dated January 24, 1989
(the "1989 Plan"), confirmation of which served to re-vest all assets of the
Estate in Wespac, free and clear of all liabilities except those payable under
the 1989 Plan. As provided for by that 1989 Plan, USREA exercised its warrants
by purportedly forgiving $715,586.50 which Wespac allegedly owed under an
Amended Financing Agreement. Wespac then liquidated all real estate assets
except a shopping center in Ogden, Utah (later sold) and three hotels located in
Spokane, Washington consisting of The Rodeway Inn-Spokane House, The Comfort Inn
Valley, and The Comfort Inn North. The 1988 Reorganization was closed by the
Court on August 21, 1992.

         On January 27, 1994, Wespac again instituted a Chapter 11 bankruptcy
proceeding styled In re: Wespac Investors Trust III, Case No. 94-00228-K11, in
the United States Bankruptcy Court for the Eastern District of Washington, to
seek a restructuring of the assets and liabilities of Wespac, in response to
certain litigation that resulted in at least one judgment. A plan of
reorganization dated March 22, 1996 (as modified) was confirmed by Order
Confirming Plan of Reorganization dated May 15, 1996, entered May 20, 1996 (the
"Confirmed Plan"). During the process of consummation of the Confirmed Plan, and
on the eve of issuance of the final decree with respect to the Confirmed Plan,
and emergence from the 1994 Reorganization, the Board of Trustees of Wespac by
motion filed October 29, 1996 sought a modification of the Confirmed Plan which
resulted in the entry of an Order from the Court approving the First
Modification to Plan of Reorganization (as modified) (the "Modification").

         Pursuant to the Confirmed Plan, Class 6 consisted of the Allowed
Interest of former public shareholders in "Old Common Stock," all of which was
cancelled on the Effective Date of the Confirmed Plan (June 15, 1996) with one
share of beneficial



                                      -7-
<PAGE>   8

interest of Wespac deemed to be exchanged for each share of Allowed Interest,
other than Greenbriar Corporation who were then to hold in the aggregate 25% of
the New Shares of Beneficial Interest. After objections to proofs of interest
demonstrating an interest in another entity, it was determined that the Allowed
Interest of such holders were equivalent to 2,642,236 Shares of Beneficial
Interest.

         Also, pursuant to the Confirmed Plan, upon the Effective Date,
Greenbriar Corporation reduced its claim to the so-called "USREA Shares"
acquired from Zimco to equal 25% of the Allowed Interest (a total of 2,642,736
Shares of Beneficial Interest) and Nevada Sea Investments, Inc. ("Nevada Sea")
was deemed to exercise an option to receive all such Shares of Beneficial
Interest. In addition, in the compromise of the Wespac Creditors' Claim,
Greenbriar Corporation was to receive, pursuant to the Confirmed Plan, 50% of
the issued and outstanding Shares of Beneficial Interest, but prior to the
Effective Date of the Confirmed Plan, by agreement, Greenbriar Corporation
entered into an arrangement pursuant to which Greenbriar Corporation conveyed to
Nevada Sea an undivided 50% in and to the creditors' claim resulting in an
undivided 25% out of an aggregate of 50% of New Shares of Beneficial Interest of
Wespac to be issued, on a "when issued" basis, to Nevada Sea in consideration of
cancellation of certain indebtedness. As a result, prior to the implementation
of the procedures set forth in the Modification and as of November 29, 1996,
there were deemed to be 10,570,944 Shares of Beneficial Interest, no par value
of Wespac, available for issuance to Shareholders, of which 2,642,736 Shares
were issuable to public shareholders (an aggregate of 25% of such Shares),
2,642,736 Shares were issuable to Greenbriar Corporation (an aggregate of 25% of
such Shares) and 5,285,472 Shares of Beneficial Interest were issuable to Nevada
Sea (an aggregate of 50% of such Shares).

         In order to ensure that the correct number of Shares were issued to
Greenbriar Corporation and Nevada Sea, Wespac and Nevada Sea entered into that
certain Share Settlement Agreement dated as of May 31, 1996 (the "Share
Settlement Agreement") pursuant to which, in the event it is ultimately
determined for whatever reason that either too many or too few Shares have been
issued to Nevada Sea and/or Greenbriar Corporation so that either or both hold
in excess of or less than the required number of issued and outstanding Shares
of Wespac pursuant to the Confirmed Plan and such Shares are issued, Wespac
agreed to either issue additional Shares or Nevada Sea (and/or Greenbriar
Corporation) are to return to Wespac for cancellation such number of Shares as
will make the percentages work out to the required percentages pursuant to the
Confirmed Plan.

         Confirmation of the Confirmed Plan (as modified) served to re-vest all
assets of the estate in Wespac free and clear of all liabilities except those
payable pursuant to the Confirmed Plan. 




                                      -8-
<PAGE>   9

Under the Confirmed Plan, Wespac retained the Spokane Properties and all allowed
claims have been provided for or paid. The effect of the Modification was to
distribute to the shareholders of Wespac a proposal to convert Wespac from a
California business trust into a Nevada corporation through the "Incorporation
Procedure" described therein, coupled with a change of the name of Wespac. Such
proposal was distributed to the shareholders of Wespac who, by November 29,
1996, approved the proposal by a vote in excess of 84% in favor. The
Incorporation Procedure was implemented. Following completion of the
Incorporation Procedure described under "Item 1. Business," Wespac submitted to
the Court a Certificate of Substantial Consummation and requested the entry of a
Final Decree on January 24, 1997 to close the 1994 Reorganization. The Final
Decree was entered by the Court February 11, 1997.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders of the Company.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         FEPI's shares of Common Stock, par value $0.01 per share, are available
for trading in the over-the-counter market, but to the knowledge of management
of FEPI, no shares have traded since their issuance. The shares of Beneficial
Interest of the Trust traded through the first quarter of 1988 and, at one time,
were quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"). Since cessation of trading on NASDAQ, there has
been no established, independent trading market for the shares of Beneficial
Interest of the Trust or the shares of Common Stock of FEPI as the successor.

         No cash dividends have been declared or paid during the period from
January 1, 1994 to the present on either the shares of Beneficial Interest of
the Trust or the shares of Common Stock of FEPI as the successor.

         As of March 13, 1998, the 10,570,944 shares of Common Stock of FEPI
issued and outstanding were held by approximately 2,400 holders of record.



                                      -9-
<PAGE>   10


ITEM 6.  SELECTED FINANCIAL DATA.

         The selected consolidated historical financial data presented below for
the fiscal year ended December 31, 1997 and the period from June 15, 1996 (fresh
start) through December 31, 1996 are derived from the audited consolidated
financial statements and reflect (i) the adoption of fresh start reporting in
accordance with AICPA Statement of Position 90-7, (ii) confirmation and
consummation of the Modified Plan, (iii) the transaction of succession, and (iv)
the acquisition by the Company of Carmel Realty, Inc. and an 81.6% limited
partnership interest in Carmel Realty Services, Ltd. The following data should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                  Period June 15, 
                                                 Years Ended          1996 to              
                                                 December 31,       December 31,                  
                                                    1997                1996
                                               ---------------   ----------------
<S>                                             <C>                <C>          
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

   Revenues ..............................      $ 33,370,720       $  1,475,831

   Operating Costs .......................         8,381,325          1,484,023

   General and Administrative ............         1,658,681            101,554

   Interest Expense ......................           399,368            209,946

   Earnings (loss) Before Income Taxes ...        22,931,346           (319,692)

   Income tax expense - current ..........          (596,215)              --

   Income tax benefit - deferred .........         5,300,000               --
                                                ------------

Net earnings (loss) ......................        27,635,131           (319,692)
                                                ============       ============

Net earnings (loss) per share ............      $       2.61       $      (0.03)
                                                ============       ============

   Weighted Average Shares outstanding ...        10,570,944         10,570,944

CONSOLIDATED BALANCE SHEET DATA:

   Total Assets ..........................      $ 74,148,980       $  5,822,865

   Short Term Debt .......................         3,951,906            879,761

</TABLE>


                                      -10-
<PAGE>   11


<TABLE>
<CAPTION>
                                                         Period June                                 
                                      Years Ended        15, 1996 to            
                                      December 31,       December 31,                
                                          1997              1996
                                     --------------     --------------
<S>                                    <C>                <C>      
   Long Term Debt.................      2,830,913         3,875,538

   Stockholders' Equity...........     61,202,697         1,067,566

   Minority Interest in Subsidiary      6,163,464                 -
</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.

         The following discussion and analysis provide information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. The discussion should
be read in conjunction with the financial statements and notes thereto.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1997, the company had total assets of $74,148,980. Of
that amount $144,906 was held in cash. The Company's long-term debt at December
31, 1997 totaled $2,830,913, which includes mortgage notes payable related to
the motel properties owned by the Company. The increase in assets and
liabilities from the prior year relates primarily to the acquisition of Carmel
Realty, Inc. and Carmel Realty Services, Ltd.

         Effective June 1, 1997, the Company sold one of the motel properties
for $1,475,000 to a former officer and director of the Company, in return for a
$1,475,000 note receivable from the buyer. The note bears interest at 5% for the
period from June 1, 1997 to June 1, 1998, and increases by 1% per year until it
reaches 9% for the period from June 1, 2001 to July 10, 2002, and collateralized
by a deed of trust on the property and a security agreement on the related
personal property. Interest only was due in monthly installments beginning in
July 1997, for a period of 60 months. The entire balance was to mature on July
10, 2002. In addition, the Company loaned the buyer $160,000 to fund needed
renovations on the property. In January 1998, the Company foreclosed on the
property and wrote off the $160,000 loan.

         Effective January 1, 1997, the Company acquired from a related party
100% of the outstanding common stock of Carmel Realty, Inc. and an 81.6% limited
partnership interest in Carmel Realty Services, Ltd. for a purchase price of
$32,500,000, consisting of 32,500 shares of Series A 8% Cumulative Preferred
Stock having a liquidation value of $1,000 per share (the "Series



                                      -11-

<PAGE>   12

A Preferred Stock"). The Series A Preferred Stock has a right to cumulative cash
dividends of $80 per share per annum; payment of $1,000 per share in the event
of dissolution, liquidation or winding up of the Company before any distribution
is made by the Company to its common shareholders; optional redemption at any
time at a price of $1,000 per share, plus cumulative dividends; no right of
conversion into any other securities of the Company; and no voting rights except
as may be required by law.

RESULTS OF OPERATIONS

         As discussed in Note B to the financial statements, the Company was
required to adopt "fresh start" reporting at the effective time of the Modified
Plan. As more fully explained in Note B, fresh start reporting requires an
allocation of the Company's reorganization value, which represents the fair
value of the Company before considering liabilities, and approximates the amount
a willing buyer would pay for the assets of the Company immediately after its
emergence from Chapter 11. As a result of adopting fresh start reporting, only
the results of operations from the effective time of the reorganization plan,
June 15, 1996, are included in the Company's statement of operations.

         For 1997, revenues totaled $33,370,720 compared to $1,475,831 for 1996.
Operating expenses were $10,040,006 compared to $1,585,577 in 1996. Earnings
from operations were $23,330,714 compared to a loss of $109,746 in 1996. These
increases from 1996 relate to the previously mentioned acquisition of Carmel
Realty, Inc. and Carmel Realty Services, Ltd.

         The income tax benefit in 1997 was due to utilization of operating loss
carry forwards generated in prior years.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Financial Statements, together with an index thereto, are attached
hereto following the signature page to this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
ACCOUNTING AND FINANCIAL DISCLOSURE.

         During the fiscal year ended December 31, 1996, the Registrant had no
principal independent accountant. During the pendency of the 1994 Reorganization
described under Item 3. Legal Proceedings above, the Trust utilized the services
of LeMaster & Daniels, PLLC, an accounting firm in Spokane, Washington, for the
preparation of internal financial statements and compilation of certain
projections and analyses in connection with the Modified Plan. Such firm did not
serve as the principal independent accountant for Registrant and during the
pendency of the 1994 Reorganization through the issuance of the Final Decree on





                                      -12-
<PAGE>   13

February 11, 1997, the Registrant had no independent accountant. Following the
issuance of the Final Decree the Registrant was unable to complete the
preparation of financial statements until late fall 1997 due to the continuous
involvement of the predecessor of the Company in bankruptcy proceedings since
1988, including the 1988 Reorganization and the 1994 Reorganization, which
required confirmation of various items over a nine-year period. During April
1997, the Board of Directors selected Farmer, Fuqua, Hunt & Munselle, P.C. to
serve as the independent auditors for the Company for the fiscal year ended
December 31, 1996. Such firm was again selected by the Board of Directors to
serve as the independent auditors for the Company for the fiscal year ended
December 31, 1997.

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS

         The business affairs of the Company are managed by, or under the
direction of, the Board of Directors. The Board of Directors is responsible for
the general investment policies of the Company and for such general supervision
of the business of the Company conducted by its officers, agents, employees,
advisors or independent contractors as may be necessary to insure that such
business conforms to policies adopted by the Board of Directors. Pursuant to
Article III, Section 3.1, of the Bylaws of the Company, there shall not be less
than three (3) nor more than fifteen (15) directors of the Company. The number
of directors shall be determined from time to time by resolution of the
directors and the last fixing of that number of directors was at three (3) at
the time of creation of the Company. The initial three directors were the three
members of the Board of Trustees of the Trust. The term of office of each
director is one year and until the election and qualification of his or her
successor. Directors may succeed themselves in office and are to be elected at
the annual meeting of stockholders or appointed by the Company's incumbent Board
of Directors.

         The current directors of the Company (two of whom are also executive
officers) are listed below, together with their ages, all positions and offices
with the Company, their principal occupation, business experience and
directorship with other companies during the last five years or more. Each of
the following individuals was named as a director in the Articles of
Incorporation of the Company filed December 19, 1996. A vacancy exists on the
Board of Directors following the resignation effective March 1, 1997 of Georgie
Liebelt. See "Item 13. Certain Relationships and Related Transactions."



                                      -13-
<PAGE>   14



     NAME                  AGE        POSITION WITH THE COMPANY
    
Karl L. Blaha              50           President

F. Terry Shumate           58           Vice President, Secretary and Treasurer


         Karl L. Blaha is President (since October 1993) and a director (since
June 1996) of American Realty Trust, Inc. ("ART"), a New York Stock Exchange
listed entity engaged in real estate, and was Executive Vice President and
Director of Commercial Management (April 1992 to October 1993) of ART. He is
also Executive Vice President and Director of Commercial Management (April 1992
to August 1995 and since July 1997) of Basic Capital Management, Inc. ("BCM"), a
contractual advisor to many entities engaged in the real estate business,
Continental Mortgage and Equity Trust ("CMET"), a publicly-held real estate
investment trust (REIT), Income Opportunity Realty Investors, Inc. ("IORI"), a
publicly-held REIT, Transcontinental Realty Investors, Inc. ("TCI"), a
publicly-held REIT, and Syntek Asset Management, Inc. ("SAMI"), the managing
general partner of National Realty, L.P. ("NRLP"), an American Stock Exchange
listed publicly-held limited partnership, and its operating partnership,
National Operating L.P. ("NOLP"); Executive Vice President (October 1992 to July
1997) of Carmel Realty, Inc. ("Carmel Realty"), a company which provides real
estate brokerage services and commercial property management services; Executive
Vice President and Director of Commercial Management (April 1992 to February
1994) of National Income Realty Trust ("NIRT") and Vinland Property Trust
("VPT"), both publicly-held REITs; partner-director of National Real Estate
Operations of First Winthrop Corporation (August 1988 to March 1992); Corporate
Vice President of Southmark Corporation ("Southmark") (April 1984 to August
1988); and President of Southmark Commercial Management (March 1986 to August
1988. Mr. Blaha was also a member of the Board of Trustees of Wespac from June
19, 1996 until implementation of the Incorporation Procedure.

         For more than the past five years, Mr. Shumate has been Vice President
and Secretary of Syntek West, Inc. (real estate investment). He has been
Secretary and Treasurer of Carmel Realty (property management and real estate
brokerage) since June 1992; sole director and President, Secretary and Treasurer
of Carmel Realty Services, Inc. (property management) since July 1990; Vice
President of SAMI (February 1989 to December 1996); and Vice President of BCM
(May 1990 to December 1996); director, Chairman of the Board, Vice President,
Secretary and Treasurer of Nevada Sea Investments, Inc. (from May 1995 to March
1997), the owner and holder of 50% of the issued and outstanding common stock of
the Company. He was Vice President, Secretary and Treasurer of Davister


                                      -14-
<PAGE>   15

Corp. (real estate) until March 18, 1997. Mr. Shumate was also a member of the
Board of Trustees and Vice President, Secretary and Treasurer of Arlington
Realty Investors (now known as Watermark Investors Trust), a publicly-held REIT,
from November 10, 1993 until December 5, 1995. Mr. Shumate was also a member of
the Board of Trustees of Wespac from June 19, 1996 until implementation of the
Incorporation Procedure.

         There are no family relationships among the directors or executive
officers of the Company.

MEETINGS AND COMMITTEES OF DIRECTORS

         The Company's Board of Directors acted upon four matters by unanimous
written consent since December 19, 1996 and has held no formal meetings. The
Board of Directors has no standing audit, nominating or compensation committee.

COMPLIANCE WITH SECTION 16(a) OF THE 1934 ACT.

         Under the securities laws of the United States, the Company's
directors, executive officers, and any person holding more than 10% of the
Company's shares of common stock are required to report their ownership of the
Company's shares and any changes in ownership to the Commission. Specific due
dates for these reports have been established and the Company is required to
report any failure to file by the date. All the filing requirements were
satisfied by the Company's directors, executive officers and 10% holders during
1996. In making these statements, the Company has relied on the written
representations of its directors and executive officers and its 10% holders and
copies of the reports that they filed with the Commission, both with respect to
the Trust, as a predecessor to the Company, and the Company.

ITEM 11.    EXECUTIVE COMPENSATION.

         Neither the executive officers nor directors received salaries or cash
compensation from the Company or its predecessor, Wespac, for acting in such
capacity during the two years ended December 31, 1997, in an amount required to
be disclosed under this item. The only director or executive officer who
received salaried compensation from the Company or its predecessor, Wespac, was
Georgie Liebelt whose compensation until her resignation effective March 1, 1997
was $59,000 per year plus a $6,000 per year car allowance. The Company has no
retirement, annuity or pension plan covering its directors or executive
officers.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The Company's voting securities consist of the shares of 




                                      -15-
<PAGE>   16

common stock, par value $0.01 per share. As of March 13, 1998, according to the
stock transfer records of the Company and other information available to the
Company, the following persons were known to be the beneficial owners of more
than five percent (5%) of the outstanding shares of common stock of the Company:

<TABLE>
<CAPTION>

    TITLE OF CLASS              NAME AND ADDRESS OF BENEFICIAL OWNER      AMOUNT AND      PERCENT OF
                                                                           NATURE OF         CLASS
                                                                          BENEFICIAL
                                                                          OWNERSHIP

<S>                            <C>                                     <C>                     <C>
Shares of Common               Nevada Sea Investments, Inc.            5,285,472 shares        50%
Stock, par value $0.01         10670 North Central Expressway
per share                      Suite 410
                               Dallas, Texas 75231

Shares of Common               Greenbriar Corporation                  2,642,736 shares        25%
Stock, par value $0.01         4265 Kellway Circle
per share                      Dallas, Texas 75248

</TABLE>




(1)  Based on 10,570,944 shares of common stock outstanding on March 13, 1998.


         As of March 13, 1998, according to the stock transfer records of the
Company and other information available to the Company, each of the directors
and executive officers of the Company, and all present executive officers and
directors as a group, beneficially own the following shares:

<TABLE>
<CAPTION>

   TITLE OF CLASS           NAME AND ADDRESS OF BENEFICIAL OWNER     AMOUNT AND    PERCENT OF
                                                                      NATURE OF     CLASS (a)
                                                                     BENEFICIAL
                                                                     OWNERSHIP

<S>                        <C>                                         <C>           <C>    
Shares of Common           Karl L. Blaha                               none          none
Stock, par value $0.01     10670 North Central Expressway
per share                  Suite 300
                           Dallas, Texas 75231

Shares of Common           F. Terry Shumate                            none          none
Stock, par value $0.01     10670 North Central Expressway
per share                  Suite 410
                           Dallas, Texas 75231

Shares of Common           All officers and directors as a group       none          none
Stock, par value $0.01 
per share
</TABLE>



                                      -16-
<PAGE>   17

(a) Based on 10,570,944 shares of common stock outstanding on March 13, 1998.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On June 25, 1996, in connection with the Confirmed Plan, the Company
received an advance of funds from Nevada Sea in the amount of $250,000 unsecured
and bearing interest at the rate of 8% per annum. All principal and interest
under such advances is due June 14, 1998. Subsequent to the initial advance,
Nevada Sea and/or its affiliates have advanced an additional $261,627 to the
Company under the same terms and conditions. As of December 31, 1997, the sum of
$511,627 is due and payable to Nevada Sea and/or its affiliates in principal,
together with interest thereon at the rate of 8% per annum.

         Effective January 1, 1997, the Company acquired from Syntek West, Inc.,
a Nevada corporation, all of the issued and outstanding common stock of Carmel
Realty, Inc., a Texas corporation ("Carmel") and an 81.6% limited partnership
interest in Carmel Realty Services, Ltd., a Texas limited partnership ("CRSL")
for an aggregate purchase price of $32,500,000, which was paid by the issuance
of 32,500 shares of Series A 8% Cumulative Preferred Stock with a liquidation
value of $1,000 per share (the "Series A Preferred Stock"). The Series A
Preferred Stock has a right to cumulative cash dividends of $80 per share per
annum, payment of $1,000 per share in the event of dissolution, liquidation of
winding up of the Company before any distribution is made to the holders of
Common Stock, optional redemption at any time at a price of $1,000 per share,
plus cumulative dividends, no right to conversion into any other securities of
the Company, and no voting rights except as may be required by law. See "Item 1.
Business," for a brief description of businesses of Carmel and CRSL and see Note
L to the Financial Statements.

         Effective January 1, 1997 the Company contracted with Regis Management
Corporation, a subsidiary of Carmel, to manage the day-to-day operations of the
Spokane Properties for 5% of the gross revenues from the Spokane Properties.

         Effective June 1, 1997, the Company sold a 90-room Rodeway Inn located
at W. 4301 Sunset Boulevard, Spokane, Washington to Georgie Liebelt. At the time
of the sale the Company paid off the underlying debt secured by the property
sold. Ms. Liebelt was appointed a Trustee of Wespac in January 1994 and served
in that capacity until implementation of the Incorporation Procedure. She was an
initial director of the Company and Regional Director for the Company
responsible for all operations involving the hotel properties located in
Spokane, Washington. Ms. Liebelt resigned as a Director effective March 1, 1997.
The purchase price for the Rodeway Inn was $1,475,000 paid by the 



                                      -17-

<PAGE>   18

delivery of a promissory note from Spokane House, Inc. (a Washington corporation
wholly owned by Georgie Liebelt) secured by a Deed of Trust covering the
property and a security interest on all related personal property. Such note
bore interest at 5% per annum for the period from June 1, 1997 to June 1, 1998
and was to increase by 1% per annum until it reached 9% for the period from June
1, 2001 to July 10, 2002. At the time of maturity of the Note, Spokane House,
Inc. was obligated to pay the lesser of (i) the total of the unpaid principal
and interest due on the note, or (ii) the appraised value of the property as of
June 1, 2002. In addition, the Company loaned to Spokane House, Inc. $160,000 to
fund needed renovations on the property. Commencing March 1, 1997, Spokane
House, Inc. became the operator of the property, retaining all income and paying
all expenses relating to the operation of the property. In January 1998 the
Company foreclosed on the property following a failure of performance on the
promissory note and wrote off the $160,000 loan. The Company intends to hold the
property for production of income. See also Note Q to the Consolidated Financial
Statements.

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a)        Financial Statements.    The following documents are filed as 
     part of this report:

<TABLE>
<CAPTION>

           1.  Consolidated Financial Statements.                                                 Page
                                                                                                  ----  
<S>                                                                                                <C>
               Independent auditor's report                                                        F-1

               Consolidated Balance Sheets as of December 31, 1997 and 1996                        F-2

               Consolidated Statements of Operations for the year ended December
               31, 1997 and the period from June 15, 1996 (fresh start) through
               December 31, 1996                                                                   F-3

               Consolidated Statements of Changes in Shareholders' Equity for
               the year ended December 31, 1997 and the period from June 15,
               1996 (fresh start) through December 31, 1996                                        F-4

               Consolidated Statements of Cash Flows for the year ended December
               31, 1997 and the period from June 15, 1996 (fresh start) through
               December 31, 1996                                                                   F-5

               Notes to Consolidated Financial Statements                                          F-6
</TABLE>



                                      -18-
<PAGE>   19


           2.     Financial Statement Schedules.

              All other schedules and financial statements are omitted because
              they are not applicable or the required information is shown in
              the financial statements or notes thereto.

     (b)   Reports on Form 8-K. During the last quarter of the period covered by
     this report, no reports on Form 8-K were filed.

     (c)   Exhibits. The following documents are filed herewith as exhibits or
     incorporated by the references indicated below:



             EXHIBIT
           DESIGNATION                    DESCRIPTION OF EXHIBIT

               2.1            Plan of Reorganization (as modified) dated March
                              22, 1996 (incorporation by reference is made by
                              Exhibit 2.1 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).



               2.2            First Amended Disclosure Statement (as modified)
                              dated March 22, 1996 (incorporation by reference
                              is made to Exhibit 2.2 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               2.3            Order Confirming Plan of Reorganization dated May
                              15, 1996 entered May 20, 1996 (incorporation by
                              reference is made to Exhibit 2.3 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               2.4            First Modification to Plan of Reorganization (as
                              modified) dated October 29, 1996 (incorporation by
                              reference is made to Exhibit 2.4 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               2.5            Ex parte Order approving modification to Plan of
                              Reorganization (as modified) entered October 29,
                              1996 (incorporation by reference is made to
                              Exhibit 2.5 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               2.6            Certificate of the Substantial




                                      -19-
<PAGE>   20
             EXHIBIT
           DESIGNATION                    DESCRIPTION OF EXHIBIT

                              Consummation dated January 21, 1997 (incorporation
                              by reference is made to Exhibit 2.6 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               2.7            Final Decree issued by the Court on February 11,
                              1997 (incorporation by reference is made to
                              Exhibit 2.7 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               3.1            Articles of Incorporation of Wespac Property
                              Corporation as filed with and endorsed by the
                              Secretary of State of California on December 16,
                              1996 (incorporation by reference is made to
                              Exhibit 3.1 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               3.2            Articles of Incorporation of First Equity
                              Properties, Inc. filed with and approved by the
                              Secretary of State of Nevada on December 19, 1996
                              (incorporation by reference is made to Exhibit 3.2
                              to Form 8-K of First Equity Properties, Inc. for
                              event reported June 19, 1996).

               3.3            Bylaws of First Equity Properties, Inc. as adopted
                              December 20, 1996 (incorporation by reference is
                              made to Exhibit 3.3 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               3.4            Agreement and Plan of Merger of Wespac Property
                              Corporation and First Equity Properties, Inc.
                              dated December 23, 1996 (incorporation by
                              reference is made to Exhibit 3.4 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               3.5            Articles of Merger of Wespac Property Corporation
                              into First Equity Properties, Inc. as filed with
                              and approved with the Secretary of State in Nevada
                              December 24, 1996 (incorporation by reference is
                              made to Exhibit 3.5 to 



                                      -20-
<PAGE>   21
             EXHIBIT
           DESIGNATION                    DESCRIPTION OF EXHIBIT

                              Form 8-K of First Equity Properties, Inc. for
                              event reported June 19, 1996).

               3.6            Certificate of Designation of Preferences and
                              Relative Participating or Optional of Other
                              Special Rights and Qualifications, Limitations or
                              Restrictions thereof of the Series A 8% Cumulative
                              Preferred Stock (incorporation by reference is
                              made to Exhibit 3.6 to Form 10-KSB of First Equity
                              Properties, Inc. for the fiscal year ended
                              December 31, 1996.)

               21*            Subsidiaries of the Registrant

               27*            Financial Data Schedule



                                      -21-
<PAGE>   22


                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed by the undersigned, thereunto
duly authorized.

                                     FIRST EQUITY PROPERTIES, INC.

Dated:   May 11, 1998
        -------
                                     By /s/ F. TERRY SHUMATE
                                       --------------------------------------- 
                                               F. Terry Shumate, Director,
                                               Vice, President, Secretary
                                               and Treasurer



         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacity and on
the date indicated.


<TABLE>


<S>                                 <C>                        <C>

/s/ KARL L. BLAHA
------------------------------      Director and President     May 11, 1998
Karl L. Blaha                       (Principal Executive      
                                    Officer)


/s/ F. TERRY SHUMATE
------------------------------      Director, Vice              May 11, 1998
F. Terry Shumate                    President, Secretary       
                                    and Treasurer
                                    (principal financial
                                    and accounting 
                                    officer)
</TABLE>



                                      -22-
<PAGE>   23


                          INDEPENDENT AUDITORS' REPORT



Board of Directors
First Equity Properties, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of First Equity
Properties, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year ended December 31, 1997 and the period from June 15,
1996 (fresh start) through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Equity Properties, Inc. and subsidiaries as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for the year ended December
31, 1997 and the period from June 15, 1996 (fresh start) through December 31,
1996, in conformity with generally accepted accounting principles.




FARMER, FUQUA, HUNT & MUNSELLE, P.C.

March 31, 1998
Dallas, Texas




                                      F-1
<PAGE>   24

                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                  December 31,

<TABLE>
<CAPTION>

                                     ASSETS
                                                                                     1997              1996
                                                                               ---------------    --------------
<S>                                                                               <C>              <C>        
Motel property and equipment, less
  accumulated depreciation of $414,313 and $129,136,  respectively                $ 5,693,509      $ 5,678,361
Cash and cash equivalents                                                             144,906           76,355
Accounts receivable - trade                                                         1,190,357           47,657
Accounts receivable - affiliate                                                    17,217,713             --
Prepaid expenses                                                                       10,500           20,492
Investments                                                                        41,526,000             --
Other assets                                                                        3,065,995             --
Deferred tax asset                                                                  5,300,000             --
                                                                                  -----------      -----------

                                                                                  $74,148,980      $ 5,822,865
                                                                                  ===========      ===========


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable                                                                     $ 2,830,913      $ 3,875,538
Notes payable - affiliate                                                           2,279,578          511,627
Accounts payable - trade                                                              444,274          181,494
Accounts payable - affiliate                                                           74,597             --
Accrued liabilities                                                                   557,242          102,554
Other current liabilities                                                                --             84,086
Income taxes payable                                                                  596,215             --
                                                                                  -----------      -----------

         Total liabilities                                                          6,782,819        4,755,299

Minority interest in subsidiary                                                     6,163,464             --

Shareholders' Equity
  Series A preferred stock, $.01 par value; 40,000 shares authorized; 32,500
    shares issued and outstanding; stated
    at liquidation value                                                           32,500,000             --
  Other preferred stock, $.01 par value;  4,960,000 shares
     authorized; none issued or outstanding                                              --               --
  Common stock, $0.01 par, 40,000,000 shares  authorized,
    10,570,944 shares issued and outstanding                                          105,710          105,710
  Capital in excess of par value                                                    1,281,548        1,281,548
  Retained earnings (deficit)                                                      27,315,439         (319,692)
                                                                                  -----------      -----------

         Total shareholders' equity                                                61,202,697        1,067,566
                                                                                  -----------      -----------

                                                                                  $74,148,980      $ 5,822,865
                                                                                  ===========      ===========
</TABLE>




   The accompanying notes are an integral part of these financial statements.

                                      F-2
<PAGE>   25


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    For the Year Ended December 31, 1997 and
      the Period from June 15, 1996 (fresh start) through December 31, 1996

<TABLE>
<CAPTION>

                                                      1997                1996
                                                 ---------------     --------------
<S>                                               <C>                <C>       
Revenue
 Commissions                                      $ 16,009,816       $       --
 Consulting fees                                     7,519,680               --
 Management fees                                     5,648,933               --
 Motel                                               1,926,227          1,431,975
 Other                                               2,266,064             43,856
                                                   ------------       ------------

                                                    33,370,720          1,475,831

Operating expenses
 Salaries and wages                                  3,900,342            532,109
 Minority interest in earnings of subsidiary         2,100,338               --
 General and administrative                          1,658,681            101,554
 Other operating expenses                              876,105            140,164
 Insurance and taxes                                   457,907             97,255
 Depreciation and amortization                         305,123            129,136
 Repairs and maintenance                               193,939             97,223
 Franchise fees                                        172,176             89,392
 Telephone and utilities                               157,463            119,469
 Advertising and promotion                             116,733             69,934
 Legal and accounting                                  101,199            209,341
                                                  ------------       ------------

       Total operating expenses                     10,040,006          1,585,577
                                                  ------------       ------------

Earnings (loss) from operations                     23,330,714           (109,746)

Other expenses
  Interest expense                                    (399,368)          (209,946)
                                                  ------------       ------------

Earnings (loss) before income taxes                 22,931,346           (319,692)

Income tax benefit (expense)
  Current                                             (596,215)              --
  Deferred                                           5,300,000               --
                                                  ------------       ------------

                                                     4,703,785               --
                                                  ------------       ------------

       NET EARNINGS (LOSS)                        $ 27,635,131       $   (319,692)
                                                  ============       ============

Earnings (loss) per share                         $       2.61       $       (.03)
                                                  ============       ============

Weighted average shares outstanding                 10,570,944         10,570,944
                                                  ============       ============
</TABLE>



   The accompanying notes are an integral part of these financial statements.


                                      F-3
<PAGE>   26


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                    For the Year Ended December 31, 1997 and
      the Period from June 15, 1996 (fresh start) through December 31, 1996


                                                                              
<TABLE>
<CAPTION>                                         
                                                                                           Capital       Retained
                                        Common Stock             Preferred Stock          in excess      earnings         Total
                                    Shares         Amount       Shares      Amount         of par        (deficit)        equity

<S>                               <C>            <C>            <C>       <C>            <C>           <C>             <C>
Balances at June 15, 1996         10,570,944     $ 105,710         ---    $        ---   $ 1,281,548   $       ---     $ 1,387,258

Net loss                                 ---           ---         ---             ---           ---      (319,692)       (319,692)
                                  ----------     ---------      ------    ------------   -----------   -----------     -----------

Balances at December 31, 1996     10,570,944       105,710         ---             ---     1,281,548      (319,692)      1,067,566

Issuance of preferred stock to
acquire subsidiary                       ---           ---      32,500      32,500,000           ---           ---      32,500,000

Net earnings                             ---           ---         ---             ---           ---    27,635,131      27,635,131
                                  ----------     ---------      ------    ------------   -----------   -----------     -----------

Balances at December 31, 1997     10,570,944     $ 105,710      32,500    $ 32,500,000   $ 1,281,548   $27,315,439     $61,202,697
                                  ==========     =========      ======    ============   ===========   ===========     ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>   27



                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    For the Year Ended December 31, 1997 and
      the Period from June 15, 1996 (fresh start) through December 31, 1996

<TABLE>
<CAPTION>

                                                                      1997               1996
                                                                 ---------------   ---------------
<S>                                                              <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
 Net (earnings) loss                                             $ 27,635,131       $   (319,692)
   Adjustments to reconcile net earnings (loss) to net cash
     used by operating activities
   Depreciation and amortization                                      305,123            129,136
   Minority interest                                                2,100,338               --
   (Increase) decrease in
       Accounts receivable - trade                                   (124,024)            36,840
       Deferred tax asset                                          (5,300,000)              --
       Accounts receivable - affiliate                            (26,945,736)              --
       Prepaid expenses and other assets                                8,507             (2,013)
   Increase (decrease) in
       Accounts payable                                               261,069             99,028
       Accounts payable - affiliate                                    74,598               --
       Accrued expenses                                               169,108             18,166
       Other current liabilities                                     (439,992)          (313,970)
       Income taxes payable                                           596,215               --
                                                                 ------------       ------------

  Net cash used by operating activities                            (1,659,663)          (352,505)

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                                (181,072)          (107,496)
   Net cash acquired from acquisition                                 298,105               --
                                                                 ------------       ------------

         Net cash provided (used) by investing activities             117,033           (107,496)

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from notes payable - affiliate                          1,767,951            511,627
   Payments on long term debt                                        (156,770)          (120,966)
                                                                 ------------       ------------

         Net cash provided by financing activities                  1,611,181            390,661
                                                                 ------------       ------------

Net increase (decrease)  in cash and cash equivalents                  68,551            (69,340)

Cash and cash equivalents at beginning of period                       76,355            145,695
                                                                 ------------       ------------

Cash and cash equivalents at end of period                       $    144,906       $     76,355
                                                                 ============       ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>   28
                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996


NOTE A - HISTORY

         WesPac Investors Trust III ("WesPac), a California business trust, was
         originally organized on August 22, 1983. Since April 1988, WesPac has
         been the subject of two filings for protection under Chapter 11 of the
         United States Bankruptcy Code. On April, 13, 1988, WesPac filed a
         Voluntary Petition in Bankruptcy (the "1988 Reorganization") which
         resulted in a Plan of Reorganization approved and confirmed by the
         Court on March 29, 1989 with certain amendments, and which was closed
         by the Court on August 21, 1992. Pursuant to the 1988 Reorganization,
         WesPac liquidated all real estate assets except three hotel properties
         located in Spokane, Washington.

         On January 24, 1994, WesPac again instituted a Chapter 11 bankruptcy
         proceeding in the United States Bankruptcy Court for the Eastern
         District of Washington (the "1994 Reorganization"). A Plan of
         Reorganization dated March 22, 1996 (as modified) was confirmed by
         Order Confirming Plan of Reorganization dated May 15, 1996 and entered
         May 20, 1996. Although WesPac did not obtain a Final Decree in the 1994
         Reorganization until later, effective with the opening of business on
         June 15, 1996, the Plan became effective for purposes of resolution of
         all claims against WesPac, as well as for a resolution of certain legal
         disputes, in exchange for cash, new indebtedness and/or new equity
         securities.

         The Plan was amended by Order entered October 29, 1996 approving the
         First Modification to Plan of Reorganization (the "Modified Plan").
         Pursuant to the Modified Plan, there was distributed to the
         shareholders of WesPac a proposal to convert WesPac from a California
         business trust into a Nevada corporation through the "Incorporation
         Procedure" described therein, coupled with a change in the name of the
         resulting entity. Such proposal was distributed to the shareholders of
         WesPac, who on November 29, 1996 approved the proposal by a vote in
         excess of 84% in favor. The Incorporation Procedure was implemented and
         resulted in transaction of succession which created First Equity
         Properties, Inc. (the "Company") as the ultimate successor-in-interest
         to WesPac, with each of the shareholders of WesPac prior to
         commencement of the Incorporation Procedure becoming shareholders of
         the Company on a one-for-one exchange basis. The Company, which was
         incorporated in Nevada on December 19, 1996, was the surviving entity
         following the incorporation of WesPac into a California corporation and
         subsequent merger of that California corporation with and into the
         Company accomplished by Articles of Merger and a Plan of Merger filed
         in the States of California and Nevada on December 24, 1996. The
         Company automatically, by operation of law, succeeded to all of the
         assets, rights, duties, liabilities and obligations of the California
         corporation (as the immediate successor to WesPac) upon the
         effectiveness of the Merger on December 24, 1996.


                                      F-6
<PAGE>   29


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE A - HISTORY - CONTINUED

         In general, the Modified Plan provided for the cancellation of the
         former publicly-held shares on the effective date of the Modified Plan
         with one share of the Company deemed to be exchanged for each former
         publicly-held share with the former public shareholders to hold, in the
         aggregate, 25% of the equity interest in the Company (an aggregate of
         2,642,736 shares of Common Stock, par value $0.01 per share of the
         Company).

         Confirmation of the Modified Plan served to re-vest all assets of the
         estate of WesPac free and clear of all liabilities, except those
         payable pursuant to the Modified Plan. Under the Modified Plan, WesPac
         retained the Spokane Motel Properties and all allowed claims were
         provided for or paid.

NOTE B - FRESH START REPORTING

         In accordance with AICPA Statement of Position 90-7, "Financial
         Reporting by Entities in Reorganization Under the Bankruptcy Code",
         ("SOP 90-7") the Company was required to adopt "fresh start" reporting
         and reflect the effects of such adoption in the financial statements as
         of June 15, 1996. The ongoing impact of the adoption of fresh-start
         reporting is reflected in the accompanying financial statements. SOP
         90-7 is applicable because pre-reorganization shareholders received
         less than 50% of the Company's new common stock and the reorganization
         value of the assets of the reorganized company was less than the total
         of all post petition liabilities and allowed claims.

         In adopting fresh-start reporting, the Company, with the assistance of
         its financial advisors, was required to determine its reorganization
         value, which represents the fair value of the entity and approximates
         the amount a willing buyer would pay for the assets immediately after
         its emergence from Chapter 11. The reorganization value of the Company
         was determined, after extensive negotiations between the Company and
         its creditors, to be $1,387,258. The reorganization value was based on,
         among other things, discounted projected cash flows for the reorganized
         company and real estate appraisals. The projected cash flows include
         assumptions as to anticipated revenues, operating expenses, and capital
         expenditures.

         SOP 90-7 requires an allocation of the reorganization value in
         conformity with the procedures specified by Accounting Principles Board
         Opinion 16, "Business Combinations", for transactions reported on the
         basis of the purchase method. In applying SOP 90-7, the Company
         allocated $5,700,000 to motel properties in recognition of their
         current appraised value and settled $800,000 of bankruptcy claims by
         issuing new common stock. The adjustments to reflect the consummation
         of the Plan and the adjustments to record assets and liabilities at
         their fair values have been reflected in the accompanying financial
         statements.



                                      F-7
<PAGE>   30


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Nature of Operations

         The Company and its subsidiaries provide management services to a
         variety of commercial and residential real estate entities throughout
         the continental United States. The Company also operates three motel
         properties in the Spokane, Washington area. In addition, the Company
         indirectly invests in real estate entities and marketable securities
         through its investment in the preferred stock of Realty Advisors, Inc.

         Principles of Consolidation

         The consolidated financial statements include the accounts of First
         Equity Properties, Inc. and its majority-owned subsidiaries, Carmel
         Realty, Inc. and Carmel Realty Services, Ltd. All significant
         intercompany accounts and transactions have been eliminated in
         consolidation.

         Cash Equivalents

         For purposes of the statement of cash flows, the Company considers all
         short-term investments with original maturities of three months or less
         to be cash equivalents.

         Property, Equipment, Depreciation and Amortization

         Property and equipment in place on June 15, 1996 are stated at fair
         value in accordance with fresh-start reporting. Additions are stated at
         cost. Depreciation and amortization are provided over the estimated
         useful lives of the assets on the straight-line method. Maintenance and
         repairs of a routine nature are charged to expense. Renewals and
         betterments which extend the useful life of existing assets are
         capitalized and depreciated over their estimated useful lives.

         Investments

         Investments consist of non-marketable investments in private companies,
         and are carried at the lower of cost or estimated net realizable value.

         Goodwill

         Goodwill represents the excess of cost over the fair value of assets
         acquired and is being amortized using the straight-line method over 40
         years. The carrying value of goodwill is periodically reviewed by the
         Company based on the expected future undiscounted operating cash flows
         of the related business unit. If it is determined that impairment has
         occurred, any excess will be charged to operations.



                                      F-8
<PAGE>   31


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

         Accounting Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make certain
         estimates and assumptions that affect the amounts reported in the
         financial statements and accompanying notes. Actual results could
         differ from those estimates.

         Income Taxes

         The Company accounts for income taxes in accordance with Statement of
         Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
         Income Taxes". SFAS 109 requires an asset and liability approach to
         financial accounting for income taxes. In the event differences between
         the financial reporting basis and the tax basis of the Company's assets
         and liabilities result in deferred tax assets, SFAS 109 requires an
         evaluation of the probability of being able to realize the future
         benefits indicated by such assets. A valuation allowance is provided
         for a portion or all of the deferred tax assets when there is an
         uncertainty regarding the Company's ability to recognize the benefits
         of the assets in future years.

         Credit Risk

         The Company's trade accounts receivable arise in the normal course of
         business and primarily relate to management of commercial and
         residential properties located throughout the United States. Such
         receivables are unsecured. The Company performs ongoing credit
         evaluations of the entities from whom such amounts are receivable. The
         Company places its cash investments in high credit quality institutions
         and, by policy, limits the amount of credit exposure to any one
         institution.

         Earnings (Loss) per Share

         Earnings (loss) per share (EPS) are calculated in accordance with
         Statement of Financial Accounting Standards No. 128, Earnings per Share
         (SFAS 128), which was adopted in 1997 for both years presented. Basic
         EPS is computed by dividing income available to common shareholders by
         the weighted average number of common shares outstanding during the
         period. Diluted EPS does not apply to the Company due to the absence of
         dilutive potential common shares. The adoption of SFAS 128 had no
         effect on previously reported EPS.



                                      F-9
<PAGE>   32


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996
<TABLE>
<CAPTION>

NOTE D - ACCOUNTS RECEIVABLE - AFFILIATES
                                                                       1997             1996
                                                                   -------------   -------------
<S>                                                                <C>              <C>           
              Syntek West, Inc.                                    $ 4,444,575      $        --
              Basic Capital Management, Inc.                        12,615,675               --
              Others                                                   157,463               --
                                                                   -----------      -----------

                                                                   $17,217,713      $        --
                                                                   ===========      ===========

NOTE E - INVESTMENTS
                                                                       1997             1996
                                                                   -----------      ------------

              Realty Advisors, Inc. preferred stock - at cost      $41,525,000      $        --
              Other - at cost                                            1,000               --
                                                                   -----------      -----------

                                                                   $41,526,000      $        --
                                                                   ===========      ===========



              The  investment  in Realty  Advisors,  Inc.  preferred  stock  represents  377,500  shares 
              of no par  value,  non-voting  preferred  stock with a liquidation value of $110 per share. 
              These shares do not earn dividends.  Realty Advisors, Inc. is an affiliated company.

NOTE F - MOTEL PROPERTY AND EQUIPMENT
                                                                       1997             1996
                                                                    -----------     -----------

              Land and improvements                                $   984,578      $   984,578
              Buildings and improvements                             4,331,114        4,269,173
              Furniture and fixtures                                   792,130          553,746
                                                                   -----------      -----------

                                                                     6,107,822        5,807,497
              Less accumulated depreciation and
              amortization                                            (414,313)        (129,136)
                                                                   -----------      -----------

                                                                   $ 5,693,509      $ 5,678,361
                                                                   ===========      ===========

NOTE G - OTHER ASSETS
                                                                       1997            1996
                                                                    -----------     -----------

               Goodwill, less accumulated amortization
                 of $75,874 at December 31, 1997                   $  2,959,099     $        --
               Deposits                                                 106,450              --
               Other                                                        446              --
                                                                   ------------     -----------

                                                                   $  3,065,995     $        --
                                                                   ============     ===========
</TABLE>



                                      F-10
<PAGE>   33


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>

NOTE H - ACCRUED LIABILITIES
                                                                                         1997                  1996
                                                                                     -------------         -------------
<S>                                                                                  <C>                   <C>          
               Accrued payroll and payroll taxes                                     $     524,952         $      53,517
               Accrued interest                                                                ---                27,184
               Accrued property taxes                                                       32,290                21,853
                                                                                     -------------         -------------

                                                                                     $     557,242         $     102,554
                                                                                     =============         =============

NOTE I - NOTES PAYABLE
                                                                                         1997                  1996
                                                                                     -------------         -------------

         Mortgage notes payable to a bank, bearing interest at 3.5% in excess of
         the U.S. T-Bill rate (as defined), payable in monthly installments of
         $26,886 including interest through maturity on April 1, 1999;
         collateralized by certain motel property and equipment.
                                                                                     $   2,433,058         $   3,433,769

         Bankruptcy claim payable, unsecured, at 10% per annum, payable in
         annual installments of $15,812 through June 2000.
                                                                                            62,990                91,429

         Bankruptcy claims payable, unsecured, at 8% per annum, payable in
         annual installments of $75,849 through June 2001.
                                                                                           334,865               350,340
                                                                                     -------------         -------------

                                                                                     $   2,830,913         $   3,875,538
                                                                                     =============         =============

         At December 31, 1997 maturities of notes payable are as follows:

                                   1998                                              $     264,793
                                   1999                                                  2,429,139
                                   2000                                                     91,659
                                   2001                                                     45,322
                                                                                     -------------

                                                                                     $   2,830,913
                                                                                     =============
</TABLE>


NOTE J - NOTES PAYABLE - AFFILIATE

         The Company has a revolving line of credit with Nevada Sea Investments,
         Inc., a shareholder. Amounts borrowed under the line bear interest at
         8% per year and are due on demand.



                                      F-11
<PAGE>   34


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE K - CAPITAL TRANSACTIONS

         The Series A preferred stock is cumulative, non-voting shares that were
         issued in 1997 in connection with the acquisition described in Note P.
         The preferred stock has an annual dividend rate of $80 per share, and
         may be redeemed at any time, at the option of the Company, at a price
         equal to the liquidation value ($1,000 per share) plus all cumulative
         dividends in arrears. The preferred stock has no right of conversion
         into any other securities of the Company. Cumulative dividends in
         arrears on the preferred stock total $2,600,000 at December 31, 1997.

         In connection with the Modified Plan, the former public shareholders of
         WesPac, other than Greenbriar Corporation ("Greenbriar"), formerly
         Medical Resource Companies of America, were to hold, in the aggregate,
         25% of the new equity interest in the reorganized entity. The former
         pubic shareholders received the equivalent of 2,642,736 new shares of
         Common Stock in the Company, with all old shares of beneficial interest
         being canceled.

         Pursuant to the Modified Plan, Greenbriar received 25% (2,642,736
         shares) of new common stock in exchange for 5,724,692 shares of old
         common stock acquired from U.S. Real Estate Advisors ("USREA"). USREA
         received its shares through exercise of warrants issued in connection
         with the 1988 Reorganization. Nevada Sea was deemed to exercise an
         option to receive all such shares. In addition, in the compromise of
         its claim as a judgment creditor, Greenbriar was to receive, pursuant
         to the Modified Plan, 50% of the issued and outstanding shares, but
         prior to the effective time of the Modified Plan, Greenbriar entered
         into an arrangement pursuant to which Greenbriar conveyed to Nevada Sea
         one-half of that claim, resulting in an undivided 25% out of an
         aggregate of 50% of the new equity of the resulting entity to be issued
         to each of Nevada Sea and Greenbriar in consideration of the
         cancellation of certain indebtedness. As a result, prior to the
         implementation of the Modified Plan, the former public shareholders
         held an undivided 25% ownership in the reorganized entity, Greenbriar
         held an undivided 25% ownership in the reorganized entity, and Nevada
         Sea held an undivided 50% ownership interest in the reorganized entity.

NOTE L - INCOME TAXES

         Income tax expense (benefit) differed from the amounts computed by
         applying the U.S. federal income tax rate of 35% to pretax income in
         1997 and 1996 as a result of the following:

<TABLE>
<CAPTION>

                                                1997               1996
                                            ------------       -------------
<S>                                         <C>                <C>         
Computed expected tax expense               $  8,110,000       $        --
Alternative minimum tax                          596,215                --
Reduction of valuation allowance             (13,410,000)               --
                                            ------------       -------------

                                            $ (4,703,785)      $        --
                                            ============       =============
</TABLE>



                                      F-12
<PAGE>   35


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE L - INCOME TAXES - CONTINUED

         The tax effects of temporary differences that give rise to the
         significant portion of the deferred tax asset at December 31, 1997 and
         1996 are as follows:

<TABLE>
<CAPTION>
                                                       1997              1996
                                                  ------------      ------------

<S>                                               <C>               <C>         
         Net operating loss carryforwards         $  5,300,000      $ 13,142,561
         Less valuation allowance                           --       (13,142,561)
                                                  ------------      ------------

         Net deferred tax asset                   $  5,300,000      $       --
                                                  ============      ============
</TABLE>


         During 1997, the Company reduced the valuation allowance to reflect the
         deferred tax assets utilized in 1997 to reduce current income taxes and
         to recognize a deferred tax asset of $5,300,000. The recognized
         deferred tax asset is based primarily upon expected utilization of net
         operating loss carryforwards.

         At December 31, 1997, the following NOL carryforwards are available:

<TABLE>
<CAPTION>
              Expiration Date                             Amount
              ---------------                        ----------------   

                    <S>                             <C>                
                    2004                            $         5,253,000
                    2005                                      9,985,000
                    2008                                        191,000
                    2011                                        159,000
                                                    -------------------

                                                    $        15,588,000
                                                    ===================
</TABLE>


NOTE M - RELATED PARTY TRANSACTIONS

         Effective January 1, 1997 the Company contracted with Regis Management
         Corporation (Regis) to manage the day to day operations of the motel
         properties for 5% of gross revenues. Regis is a subsidiary of Carmel
         Realty, Inc.



                                      F-13
<PAGE>   36


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE N - FINANCIAL INSTRUMENTS

         The estimated fair values of the Company's financial instruments at
         December 31, 1997 and 1996 follow:

<TABLE>
<CAPTION>
                                                                 1997                              1996
                                                    ------------------------------    ------------------------------
                                                      Carrying          Fair            Carrying            Fair
                                                       Amount           Value             Amount            Value
                                                    ------------      ------------     ------------    -------------   
<S>                                                  <C>              <C>              <C>              <C>      
         Accounts receivable - affiliates            $17,217,713      $17,217,713      $      --        $      --
         Investments                                  41,526,000       41,526,000             --               --
         Notes payable                                 2,830,913        2,830,913        3,875,538        3,875,538
         Notes payable - affiliate                     2,279,578        2,279,578          511,627          511,627
</TABLE>


         The carrying values of cash and cash equivalents, accounts receivable
         and payable, and accrued liabilities approximate fair value due to
         short-term maturities of these assets and liabilities.

         Investments are accounted for using the cost method and pertain to
         investments in companies for which fair values are not readily
         available, but are believed to exceed carrying amounts.

         The aggregate fair value of notes payable and notes payable-affiliate
         approximate carrying amounts due to their short maturities.

NOTE O - COMMITMENTS AND CONTINGENCIES

         The Company leases land for one of the motel properties and various
         office and storage space, under operating leases, which expire at
         various dates through April 30, 2028. During the periods ended December
         31, 1997 and 1996, total rent expense was approximately $338,000 and
         $50,000, respectively. The estimated annual minimum lease payments
         remaining on the initial lease terms as of December 31, 1997 are:

<TABLE>
                  <S>                  <C>               
                  1998                 $     887,703
                  1989                     1,121,063
                  2000                     1,070,050
                  2001                       727,229
                  2002                       712,513
               Thereafter                 10,381,311
                                       ------------- 
                                       $  14,899,869
                                       =============
</TABLE>



                                      F-14
<PAGE>   37


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE O - COMMITMENTS AND CONTINGENCIES - CONTINUED

         The Company provides management services primarily to five affiliated
         publicly traded real estate entities throughout the United States.
         Under such arrangements, the Company receives a fee of 5% or less of
         the monthly gross rents collected on the properties under management.
         The Company subcontracts with other entities for the provision of
         property level services. All property management contracts with the
         five publicly traded real estate entities are subject to cancellation
         with 30 days notice.

         The Company also provides real estate brokerage services to the five
         affiliated publicly traded real estate entities and a number of other
         entities, and receives brokerage commissions under varying arrangements
         from a fixed amount to a sliding scale on a percentage basis. In
         general, such services include providing assistance in locating,
         leasing or purchasing real estate. The Company receives fees equal to
         the lesser of (i) a percentage of the cost of acquisition, inclusive of
         commissions, if any, paid to nonaffiliated brokers, or (ii) the
         compensation customarily charged in similar transactions by others
         rendering similar property acquisition services.

         The Company has various motel franchise agreements calling for between
         5% and 6% of gross room receipts, plus certain other costs, be paid for
         marketing and reservation services and royalty fees.

         The Company is involved in various legal actions incidental to its
         business. In Management's opinion, none of these actions will have a
         material adverse effect on the Company's financial position.

NOTE P - ACQUISITION

         Effective January 1, 1997, the Company acquired from a related party,
         100% of the outstanding common stock of Carmel Realty, Inc. and an
         81.6% limited partnership interest in Carmel Realty Services, Ltd. (the
         "Acquired Companies"), for a purchase price of $32,500,000, consisting
         of 32,500 shares of Series A 8% Cumulative Preferred Stock having a
         liquidation value of $1,000 per share (the "Preferred Stock"). The
         Preferred Stock has a right to cumulative cash dividends of $80 per
         share per annum; payment of $1,000 per share in the event of
         dissolution, liquidation or winding up of the Company before any
         distribution is made by the Company to its common shareholders;
         optional redemption at any time at a price of $1,000 per share, plus
         cumulative dividends; no right of conversion into any other securities
         of the Company; and no voting rights, except as may be required by law.
         The acquisition has been accounted for using the purchase method of
         accounting. Accordingly, the Acquired Companies' results of operations
         are included in the consolidated financial statements since the date of
         acquisition. The excess of the purchase price over assets acquired
         approximated $3,035,000 and is being amortized over 40 years.




                                      F-15
<PAGE>   38


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996


NOTE Q - SALE AND FORECLOSURE OF HOTEL PROPERTY

         Effective June 1, 1997, the Company sold one of its motel properties to
         a former officer and director of the Company, and paid off the
         underlying mortgage, in return for a note receivable from the buyer
         with a face amount of $1,475,000. The note initially bore interest at
         5%, increasing by 1% per year until it reached 9% for the period from
         June 1, 2001 to July 10, 2002, and was collateralized by a deed of
         trust on the property and a security agreement on the related personal
         property. Interest only was due in monthly installments beginning in
         July, 1997, for a period of 60 months. The entire balance was to be due
         on July 10, 2002. At the maturity of the note, the buyer was obligated
         to pay the lower of the total of unpaid principal and interest due on
         the note, or the appraised value of the property as of June 1, 2002.
         Accordingly, the note receivable was initially recorded at an amount
         equal to the book value of the related motel property, resulting in no
         gain or loss on the transaction. In addition, the Company loaned the
         buyer $160,000 to fund needed renovations on the property. Commencing
         March 1, 1997, the buyer became the operator of the property, retaining
         all income and paying all expenses related to operation of the
         property.

         In January 1998, the Company foreclosed on the property following a
         lack of performance by the buyer on the related note receivable. It is
         management's intent to hold the property for the production of income.
         The property has been recorded at the amount of the net receivable,
         which is lower than the fair value of the property, in the accompanying
         financial statements. The $160,000 loan has been written off and
         included in the 1997 consolidated statement of operations. Results of
         operations for the property for the period from March 1, 1997 through
         December 31, 1997 were retained by the buyer and are not included in
         the accompanying consolidated statement of operations for the year
         ended December 31, 1997.

NOTE R - SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                              1997             1996
                                                          ------------     -------------
<S>                                                       <C>              <C>        
         Cash paid during the year for:
           Interest                                       $   288,742      $   174,211
           Income taxes                                          --               --

         Noncash investing and financing activities:
           Preferred stock  issued for acquisition         32,500,000             --
           Long term debt paid by related party               887,855             --
           Stock issued to company to retire debt           9,482,000             --
</TABLE>




                                      F-16
<PAGE>   39


                 FIRST EQUITY PROPERTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                           December 31, 1997 and 1996

NOTE R - SUPPLEMENTAL CASH FLOW INFORMATION - CONTINUED

<TABLE>
<CAPTION>
                                                           1997               1996
                                                       ------------       --------------
<S>                                                    <C>                <C>           
         Details of acquisition:
           Fair value of assets acquired                 34,171,349                   --
           Liabilities assumed                           (4,706,322)                  --
           Goodwill                                       3,034,973                   --
           Stock issued                                 (32,500,000)                  --
                                                       ------------       --------------
           Cash paid                                           --                     --
           Plus: cash acquired                              298,105                   --
                                                       ------------       --------------
           Net cash acquired from acquisition          $    298,105       $           --
                                                       ============       ==============
</TABLE>


NOTE S - EMPLOYEE BENEFIT PLAN

         The Company has a 401(k) plan for the benefit of its employees.
         Employees can contribute to the plan up to 15% of their salary, subject
         to certain maximum dollar amounts set forth by the Internal Revenue
         Service, pursuant to a salary reduction agreement, upon meeting age and
         length of service requirements. The Companies' matching contribution is
         a discretionary percentage of electing employees' contributions, and
         totaled $4,320 in 1997.

NOTE T - BUSINESS SEGMENTS

         Prior to January 1, 1997, the Company's only business consisted of the
         management of three motels in the Spokane, Washington area. In 1997,
         the Company's operations have been classified into three business
         segments: hospitality, property management and real estate brokerage.
         Hospitality relates to the operations of the Company's three motel
         properties. Property management relates to services rendered primarily
         to five publicly-traded real estate entities, in connection with the
         management of commercial real property, including retail centers,
         office buildings, industrial properties and hotels. Real estate
         brokerage relates to services rendered primarily to five
         publicly-traded real estate entities, in connection with locating,
         leasing and purchasing real estate. Summarized financial data by
         segment for 1997 is as follows:

<TABLE>
<CAPTION>
                                                  Hospitality    Property     Real Estate                 Adjustments
                                                    Business     Management    Brokerage       Other    & Eliminations  Consolidated
                                                  -----------    -----------   ----------    ---------  --------------  ------------
<S>                                               <C>            <C>           <C>           <C>          <C>           <C>        
     Revenues                                     $ 1,926,227    $18,815,921   $16,054,816   $  253,034   $(3,679,278)  $33,370,720
                                                  ===========    ===========   ===========   ==========   ===========

     Operating profit (loss)                      $  (288,995)   $14,356,856   $12,256,353   $  253,037   $   (45,000)  $26,532,251
                                                  ===========    ===========   ===========   ==========   ===========
     General corporate expenses                                                                                          (1,500,567)
     Minority interest in earnings of subsidiary                                                                         (2,100,338)
                                                                                                                        -----------
     
     Earnings before income taxes                                                                                       $22,931,346

     Identifiable assets                          $12,998,401    $14,214,196   $       ---                              $27,213,597
                                                  ===========    ===========   ===========
     Corporate assets                                                                                                    46,935,383
                                                                                                                        -----------
                                                                                                                        $74,148,980
</TABLE>


Corporate assets include cash and cash equivalents, investments and deferred tax



                                      F-17
















<PAGE>   40
                               INDEX TO EXHIBITS



             EXHIBIT
           DESIGNATION                     DESCRIPTION OF EXHIBIT

               2.1            Plan of Reorganization (as modified) dated March
                              22, 1996 (incorporation by reference is made by
                              Exhibit 2.1 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).



               2.2            First Amended Disclosure Statement (as modified)
                              dated March 22, 1996 (incorporation by reference
                              is made to Exhibit 2.2 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               2.3            Order Confirming Plan of Reorganization dated May
                              15, 1996 entered May 20, 1996 (incorporation by
                              reference is made to Exhibit 2.3 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               2.4            First Modification to Plan of Reorganization (as
                              modified) dated October 29, 1996 (incorporation by
                              reference is made to Exhibit 2.4 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               2.5            Ex parte Order approving modification to Plan of
                              Reorganization (as modified) entered October 29,
                              1996 (incorporation by reference is made to
                              Exhibit 2.5 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               2.6            Certificate of the Substantial





<PAGE>   41
             EXHIBIT
           DESIGNATION                    DESCRIPTION OF EXHIBIT

                              Consummation dated January 21, 1997 (incorporation
                              by reference is made to Exhibit 2.6 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               2.7            Final Decree issued by the Court on February 11,
                              1997 (incorporation by reference is made to
                              Exhibit 2.7 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               3.1            Articles of Incorporation of Wespac Property
                              Corporation as filed with and endorsed by the
                              Secretary of State of California on December 16,
                              1996 (incorporation by reference is made to
                              Exhibit 3.1 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               3.2            Articles of Incorporation of First Equity
                              Properties, Inc. filed with and approved by the
                              Secretary of State of Nevada on December 19, 1996
                              (incorporation by reference is made to Exhibit 3.2
                              to Form 8-K of First Equity Properties, Inc. for
                              event reported June 19, 1996).

               3.3            Bylaws of First Equity Properties, Inc. as adopted
                              December 20, 1996 (incorporation by reference is
                              made to Exhibit 3.3 to Form 8-K of First Equity
                              Properties, Inc. for event reported June 19,
                              1996).

               3.4            Agreement and Plan of Merger of Wespac Property
                              Corporation and First Equity Properties, Inc.
                              dated December 23, 1996 (incorporation by
                              reference is made to Exhibit 3.4 to Form 8-K of
                              First Equity Properties, Inc. for event reported
                              June 19, 1996).

               3.5            Articles of Merger of Wespac Property Corporation
                              into First Equity Properties, Inc. as filed with
                              and approved with the Secretary of State in Nevada
                              December 24, 1996 (incorporation by reference is
                              made to Exhibit 3.5 to 




<PAGE>   42
             EXHIBIT
           DESIGNATION                    DESCRIPTION OF EXHIBIT

                              Form 8-K of First Equity Properties, Inc. for
                              event reported June 19, 1996).

               3.6            Certificate of Designation of Preferences and
                              Relative Participating or Optional of Other
                              Special Rights and Qualifications, Limitations or
                              Restrictions thereof of the Series A 8% Cumulative
                              Preferred Stock (incorporation by reference is
                              made to Exhibit 3.6 to Form 10-KSB of First Equity
                              Properties, Inc. for the fiscal year ended
                              December 31, 1996.)

               21*            Subsidiaries of the Registrant

               27*            Financial Data Schedule